Is a New York resident trust exempt from New York State and New York City personal income tax when its sole trustee, its corpus, and all of its income are all located outside New York?

Plain-English summary

Charles B. Moss, Jr., trustee of the Charles B. Moss Trust U/A/D 12/20/76, asked the Department whether the trust was exempt from New York State and New York City personal income tax for 1990-1992, and if so, whether it could recover the $6,151 in state and city tax it had already paid for those years ($1,311 in 1990, $1,480 in 1991, and $3,360 in 1992).

The trust was created December 20, 1976 by Charles Moss (now deceased), who was domiciled in New York at the time the trust became irrevocable. Because of that fact alone, Tax Law § 605(b)(3)(C) and Reg. § 105.23(a) classify the trust as a New York "resident trust" as a matter of statutory definition - regardless of where the trustee, the trust property, or the income actually are. The sole trustee, Charles B. Moss, Jr. (the grantor's son), sold his New York home and became domiciled in Connecticut in 1985, then moved to Colorado in 1991. For 1990-1992 the trust's corpus consisted entirely of intangibles - cash, marketable securities, U.S. government obligations, and loans receivable - physically held by Fiduciary Trust Company in New York City, though none of those assets were used in a New York business, and all trust income and gains came from sources outside New York.

The Department explained that being a "resident trust" by statutory definition does not automatically mean the trust owes New York tax. Reg. § 105.23(c) carves out an exemption when three conditions are all satisfied: (1) every trustee is domiciled outside New York; (2) the entire corpus, including any real or tangible property, is located outside New York; and (3) all income and gains are derived from sources outside New York, determined as if the trust were a nonresident. The Department found the first and third conditions plainly met on these facts. For the second condition, it relied on settled law that the situs of a trust's intangible assets is deemed to follow the trustee's domicile, not the location of whatever bank or custodian physically holds the securities - so the fact that Fiduciary Trust Company held the assets in New York City did not keep the corpus "in" New York once the trustee himself was domiciled in Connecticut and then Colorado. The Department grounded this situs rule in Mercantile-Safe Deposit and Trust Co. v. Murphy (New York could not tax income accumulated by an out-of-state trustee for resident beneficiaries with no present right to it, because doing so would violate the Fourteenth Amendment), Taylor v. State Tax Commission (a decedent's New York domicile alone doesn't establish tax jurisdiction over a resident trust), and the U.S. Supreme Court's decision in Safe Deposit & Trust Co. v. Virginia (a state cannot tax an out-of-state trustee's corpus merely because the beneficiaries or grantor were domiciled in-state).

Because all three Reg. § 105.23(c) conditions were met for 1990-1992, the Department concluded that no New York State personal income tax - and consequently no New York City personal income tax under Article 30 - was imposed on the trust for those years, entitling the trust to its requested refund.

What this means for you

Trustees and fiduciaries of NY-created trusts who move out of state

A trust created by a New York domiciliary doesn't stop being a New York "resident trust" just because the trustee later moves away - that classification is locked in at the moment the trust became irrevocable. But residency status and taxability are two different questions. If you are the trustee (or successor trustee) of such a trust and you relocate your own domicile outside New York, and the trust's corpus and all of its income also have no New York-source connection, the trust may qualify for the Reg. § 105.23(c) exemption even though a New York bank or custodian continues to physically hold the securities. Keeping clear records of the trustee's domicile history and the trust's income sources is what makes this exemption provable.

Accountants advising on resident-trust exemption planning

When evaluating whether a client's New York resident trust can stop paying New York tax, check all three Reg. § 105.23(c) conditions together - a trust fails the exemption if even one trustee remains domiciled in New York, if any part of the corpus (including real or tangible property) is located in New York, or if any income is New York-source. Remember that for intangible assets, "location of the corpus" turns on the trustee's domicile rather than where a depository bank happens to sit, per Mercantile-Safe Deposit and Trust Co. v. Murphy and Safe Deposit & Trust Co. v. Virginia. Also note the exemption can apply retroactively to open years: this trust had been filing and paying New York State and City tax since inception before claiming (and receiving) a refund for the three years still open under the statute of limitations.

Common questions

Q: Why was the Charles B. Moss Trust considered a "New York resident trust" at all, if its trustee lived in Connecticut and Colorado?
A: Resident-trust status under Tax Law § 605(b)(3)(C) and Reg. § 105.23(a) is fixed by the grantor's domicile at the time the trust property was transferred or became irrevocable - here, Charles Moss's New York domicile in 1976. Where the trustee lives afterward doesn't change that initial classification; it only matters for the separate question of whether tax is actually owed.

Q: If the trust is a "resident trust," how can it owe no New York tax?
A: Reg. § 105.23(c) exempts a resident trust from New York State (and City) personal income tax if all trustees are domiciled outside New York, the entire corpus is located outside New York, and all income and gains are from non-New York sources. The Moss Trust met all three conditions for 1990-1992.

Q: The trust's securities were held by a bank in New York City - doesn't that mean the corpus was located in New York?
A: No. The opinion holds that the situs of a trust's intangible assets (cash, securities, U.S. government obligations) is deemed to be at the domicile of the trustee, not the location of whatever custodian bank physically holds them. Because the trustee was domiciled in Connecticut and then Colorado during the years at issue, the corpus's legal situs was outside New York even though Fiduciary Trust Company held the assets in New York City.

Q: What constitutional principle backs up the "situs follows the trustee" rule?
A: The Department cited Mercantile-Safe Deposit and Trust Co. v. Murphy and the U.S. Supreme Court's decision in Safe Deposit & Trust Co. v. Virginia, both holding that a state violates the Fourteenth Amendment's due process clause by taxing trust property held by an out-of-state trustee merely because the beneficiaries or grantor are domiciled in the taxing state.

Q: Did the trust get its money back?
A: Yes. Because no New York State or City tax was actually owed for 1990-1992, the trust was entitled to a refund of the $6,151 in state and city tax it had already paid for those years ($1,311 in 1990, $1,480 in 1991, and $3,360 in 1992), the years not barred by the statute of limitations.

Citations and references

• Tax Law § 605(b)(3)(C) - defines a New York resident trust by reference to the grantor's domicile when the trust property was transferred or became irrevocable
• Reg. § 105.23(a) - restates the statutory resident-trust definition
• Reg. § 105.23(c) - no New York State personal income tax may be imposed on a resident trust if all trustees are domiciled outside New York, the entire corpus is located outside New York, and all income and gains are from non-New York sources
• Mercantile-Safe Deposit and Trust Co. v. Murphy, 19 AD2d 765, aff'd 15 NY2d 579 - taxing a New York resident trust's income held by a nonresident trustee, for beneficiaries with no present right to it, violates the Fourteenth Amendment
• Taylor v. State Tax Commission, 85 AD2d 821 - a decedent's New York domicile alone, making a trust a resident trust by statutory definition, is insufficient to establish New York tax jurisdiction
• Safe Deposit & Trust Co. v. Virginia, 280 US 83 - U.S. Supreme Court holding that a state cannot tax an out-of-state trustee's corpus based solely on the domicile of the beneficiaries or grantor

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a94_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-94 (7) I
Income Tax
April 8, 1994

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I940121A

On January 21, 1994, a Petition for Advisory 0pinion was received from
Charles B. Moss, Jr., Trustee Charles B. Moss Trust U/A/D 12/20/76, c/o Anchin,
Block & Anchin, 1375 Broadway - 18th Floor, New York, New York 10018.
The issue raised by Petitioner, Charles B. Moss, Jr., Trustee Charles B.
Moss Trust U/A/D 12/20/76, is whether Petitioner is exempt from personal income
tax pursuant to section 105.23 (c) (formerly section 102.4(c)) of the Personal
Income Tax Regulations, and consequently, whether Petitioner is entitled to
refunds of New York State and New York City personal income tax paid in the
amount of $6,151 for taxable years not barred by the statute of limitations
(1990-1992).
Petitioner is a complex inter vivos trust created on December 20, 1976 by
a New York domiciliary, Charles Moss (now deceased). The sole trustee is his
son, Charles B. Moss, Jr. In 1985, the trustee sold his New York home and became
domiciled in the State of Connecticut. In 1991 he moved to Colorado, where he
presently resides.
For the years at issue, 1990-1992, the corpus of the trust consisted solely
of intangibles:
cash in checking and money market accounts, marketable
securities and U.S. Government obligations, and loans receivable from other
trusts and companies affiliated with the trustee. The cash, securities, and U.S.
Government obligations were held by Fiduciary Trust Company, which is located in
New York City. None of the assets were employed in a business carried on in New
York, and all income and gains of the trust were derived from sources outside of
New York State, determined as if the trust were a nonresident.
The trust has filed New York State fiduciary income tax returns, and paid
the New York State and New York City resident income tax since inception. For
the years 1990, 1991 and 1992 these taxes amounted to $1,311, $1,480 and $3,360
respectively.
Section 605(b)(3)(C) of the Tax Law defines a resident trust as
follows:
a trust, or portion of a trust, consisting of the property of:
(i) a person domiciled in this state at the time such property was
transferred to the trust, if such trust or portion of a trust was
then irrevocable, or if it was then revocable and has not
subsequently become irrevocable; or
(ii) a person domiciled in this state at the time such trust, or
portion of a trust, became irrevocable, if it was revocable when
such property was transferred to the trust but has subsequently
become irrevocable.
TP-9 (9/88)

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TSB-A-94 (7) I
Income Tax
April 8, 1994

For the purposes of the foregoing, a trust or portion of a trust is
revocable if it is subject to a power, exercisable immediately or at
any future time, to revest title in the person whose property
constitutes such trust or portion of a trust, and a trust or portion
of a trust becomes irrevocable when the possibility that such power
may be exercised has been terminated.
Section 105.23 of the Personal Income Tax Regulations provides as follows:
(a) A resident ... trust is:
...
(3) a trust or portion of a trust, consisting of the property
of:
(i) a person domiciled in New York State at the time
such property was transferred to the trust, if such
trust or portion of a trust was then irrevocable, or if
it was then revocable, and has not subsequently become
irrevocable; or
(ii) a person domiciled in New York State at the time
such trust, or portion of a trust, became irrevocable,
if it was revocable when such property was transferred
to the trust but has subsequently become irrevocable.
(b) For purposes of subdivision (a) of this section, a trust or
portion of a trust is revocable if it is subject to a power,
exercisable immediately or at any future time, to revest title in
the person whose property constitutes such trust or portion of a
trust, and a trust or portion of a trust becomes irrevocable when
the possibility that such power may be exercised has been
terminated.
(c) The determination of whether a trust is a resident trust is not
dependent on the location of the trustee or the corpus of the trust
or the source of income; provided, however, no New York State
personal income tax may be imposed on such trust if all of the
following conditions are met:
(1) all the trustees are domiciled in a state other than New
York State;
(2) the entire corpus of the trust, including real and
tangible property is located outside of New York State; and
(3) all income and gains of the trust are derived or connected
from sources outside of New York State, determined as if the trust
were a nonresident.
Herein, the Charles B. Moss Trust is a trust consisting of property of a
person domiciled in New York State at the time such property was transferred to
the trust, and the trust was irrevocable. Accordingly, the Charles B. Moss trust
is a resident trust of New York pursuant to section 605(b)(3)(C) of the Tax Law
and section 105.23 of the Regulations. However, this fact does not ipso facto
mean that it is subject to New York State personal income tax under Article 22

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Income Tax
April 8, 1994

of the Tax Law.
In Mercantile-Safe Deposit and Trust Company v Murphy, 19 AD2d 765, affd
15 NY2d 579, New York sought to tax dividends accumulated after the death of the
donor by the nonresident trustee of an inter vivos trust created in Maryland by
a resident of New York. The basis of New York's claim was that the trust was a
resident trust under New York law and the beneficiaries were residents of New
York even through they had no present right to the income. The Court of Appeals
held "that the imposition of a tax in the State in which the beneficiaries of a
trust reside, on securities in the possession of the trustee in another State,
to the control or possession of which the beneficiaries have no present right,
is in violation of the Fourteenth Amendment". The Appellate Division decision,
affirmed by the Court of Appeals, specifically stated that the trust was a
resident trust by statutory definition but that attempting to tax the income held
by a trustee in another state was extending "the taxing power of the State to
property wholly beyond its jurisdiction and thus [in] conflict with the due
process clause of the Fourteenth Amendment of the Federal Constitution". (See,
Taylor v State Tax Commission, 85 AD2d 821, 822: "The fact that the former owner
of the property in question died while being domiciled in New York, making the
trust a resident trust under New York tax law, is insufficient to establish a
basis for jurisdiction".)
The situs of intangible assets of a trust are deemed to be at the domicile
of the trustee. In a case where the State of Virginia sought to tax the entire
corpus of a trust consisting of securities in the hands of a Maryland trustee,
the Virginia tax being based on domicile in Virginia of the beneficial owners,
the Supreme Court held that such a tax conflicted with the Fourteenth Amendment
because Virginia was taxing things wholly beyond its jurisdiction (Safe Deposit
& Trust Co. v Virginia, 280 US 83). [While no mention was made in Safe Deposit
Co. of the residency of the trust, under New York Law it would have been a
resident trust of Virginia because the Virginia grantor of the inter vivos trust
reserved to himself a right of revocation which was unexercised at the time of
his death.]
Based on the facts herein for the years in issue, the three conditions
contained in section 105.23(c) of the Personal Income Tax Regulations have been
met. First, Petitioner is the sole trustee of the trust and in 1985 he sold his
New York home and became domiciled in Connecticut and, in 1991, he moved to
Colorado, where he presently resides. Second, the corpus of the trust consisted
solely of intangibles and that cash, securities and U.S. Government obligations
were held by Fiduciary Trust Company located in New York State. Third, none of
the assets of the trust were employed in a business carried on in New York and
all income and gains of the trust were derived from sources outside of New York
State, determined as if the trust were a nonresident. With respect to the second
condition, the situs of intangible assets of a trust are deemed to be at the
domicile of the trustee. (See: Safe Deposit & Trust Co., supra.; MercantileSafe Deposit and Trust Co., Supra.; and Taylor, supra). Herein, the situs of the
corpus of the trust is deemed to be outside New York State.

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Accordingly, the Charles B. Moss Trust is a New York resident trust.
However, since the three conditions contained in section 105.23(c) of the
Personal Income Tax Regulations have been met, for the taxable years at issue,
1990, 1991 and 1992, no New York State personal income tax is imposed on such
trust for said years.
The New York City personal income tax is similar to the New York State
personal income tax and is administered by New York State the same as Article 22
of the Tax Law. Accordingly, since the Charles B. Moss Trust has met the three
conditions contained in section 105.23(c) of the New York State Personal Income
Tax Regulations and no New York State personal income tax is imposed on such
trust for taxable years 1990, 1991 and 1992, no New York City personal income tax
authorized under Article 30 of the Tax Law is imposed on such trust for such
taxable years.

DATED: April 8, 1994

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.